Back again from a long hiatus. In this particular commentary, i would like to address some current issues that are affecting the economy in Papua New Guinea.
Most policy defenders tend to claim that, the down turn in the PNG economy was due to low international prices for Papua New Guinea;s major exports. In a way that is right, oil prices slumped from over 100 dollars per barrel to less than 60 dollar per barrel, while other major commodity prices also declined. International factors become good excuses for successive governments to act big when we have surplus and we don't worry about the rainy days. In economics we call this business cycle, a time for prosperity and a time for slump in the economy. It is well documented and all economist know this.
PNG economy experienced a boom from 2012 onward, with high inflow of foreign currency, and phenomenal growth figures, which showed a pick up in economic development in the country. When we have everything happening for us, the government decided to go on an expansionary fiscal regime, however successively running budget surpluses for several years. Not knowing what to do with the surplus, they parked the surpluses in trust accounts opened with the commercial banks.
With surpluses, the government spending was carefree, with donations, and tax holidays to major companies who were engaged in tax credit schemes. The sunny days for the government seem endless, as commodity prices remain high, and the influx of capital for the LNG project which boosted the economy. The Governments carefree spending continued over the years.
The current financial woes is the culmination of all the carefree policies and spending of the government during the sunny days. An appetite for financial over spending has been created at Waigani and to maintain that appetite, the government has to look for money during the rainy days. The current woes have resulted in the depletion of Trust Account funds, and the accumulation of debt it the government accounts. Rather than trimming down, expenditure seem to be at the same rate as in the sunny days, resulting in draining of foreign reserves, as demand increases for imported products. Hence the decision by the Central Bank to ration foreign exchange interventions so as not to drain all foreign reserves. The problems are:
1. Governments export proceeds from the LNG flows goes straight to Kumul holdings, rather than coming to the Central Bank for it to exchange much needed foreign currency to support the foreign exchange market.
2. Tax holidays for major companies. When you stop the tap from flowing, the water does not flow. Big companies in the country have been given tax holidays in the form of tax credit schemes or, outright tax holidays. The government has stopped its major source of funding for the budget. Without this, they will depend on small people like you and me to fund them through income and GST taxes.
3. All economist know the concept of business cycle. For the 10 years that the government enjoyed good prices and influx of foreign capital, they did not safe some for rainy days, hence the current situation.
4. Borrowing of the UBS loan to buy shares. This is one of the most absurd and unheard of financial decision the government has made with its advisers. Did an economist gave the government this advise? if he did, his/her paper is not worth is, because, in finance, both the share price and the variable interest on the loan that was borrowed from UBS are unpredictable. What if the share prices of Oil Search goes down, during the term of the period of the loan. PNG makes a big loss. Even on exchange rate gain/losses, inflation etc, did they take into account this factors before they borrowed? This is one of the most absurd financial decisions the government has made and the country has to pay for it.

To be continued........

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Life is fragile, take each turn with caution, and live it to the full...

Happy 2017 to all. What a year for everyone in PNG. Election around the corner, commodity prices have not improved, government running budget deficits, 2018 APEC meeting around the corner, public servants not getting paid on time for the last few fortnights and still no improvement in the forex market. We are in for a shocker in 2017. Time for economists in the country to scratch their head and find a solution, if not we are heading for disaster.

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Life is fragile, take each turn with caution, and live it to the full...

2017 is going to be a challenging year for Papua New Guinea. Government cash flow problems experienced over the last 3 years is taking a toll on the government coffers. This year is an election year, and the government needs more funds to run the election. Coming out from an El Nino weather which had affected PNG's major export commodities, like coffee, cocoa, copra etc, foreign exchange inflows would be greatly affected. On the other hand, a government that is spending excessively, with no hindsight for future income flows to finance the excessive spending, while on the other side, the tap for foreign exchange flow is drying up, with low export commodity production. Mind you, research has shown that, during election period, production of export commodity especially coffee goes down, because every one is getting on the election bandwagon, looking for free lamb flaps, and not attending to their coffee patches.
On the international side of things, President Trump's, international policy on trade will definitely have an impact on PNG's exports, as trade partners of US scramble to adjust their positions on world trade, with Trump's emphasis on reviewing most of the trade agreements between US and rest of the world.
Challenge for the Government still comes down to how and from where income will be generated to fund the 2017 budget. SOE's have been forced to pay dividends without proper declaration of profits, resulting in lots of restructures happening within the SOE's, while high tax revenue from the mineral sector, usually resulting from high mineral prices have dried up due to lower crude oil and mineral prices. People and companies operating in the country have been over-taxed and there is no leeway for more tax increases. Government's ceiling on debt to GDP ratio has far exceeded the legislated cap, which is 35 percent.
Looking at the expenditure side, far outweighs the budgeted revenue. Over half the budgeted expenditure would be taken up by, Free Education and Healthcare costs, election related costs, infrastructure for APEC, repayment of existing international and domestic loans.
Given this scenario, the only bail out situation i see is, to go for a bigger international loan, even if it means going above the required ceiling. Otherwise, ask for bail out from the IMF, who will come in with structural reforms. I see, a bleak 2017 for PNG, and i hope those people in power see this too and act accordingly, to bail out the economy, otherwise we become another Greece, who faced the similar mis-fortune.

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Life is fragile, take each turn with caution, and live it to the full...

Over the years, the coffee industry via, the Coffee Industry Corporation has tried its best to mitigate or prevent the entry of infectious disease spread by insects that affect the fruition of coffee beans. The latest news we hear is of the presence of coffee pod borer disease in the Eastern Highlands province. This is sad news for the country, where finest natural coffee is produced without use of fertilizers.

A similar fate was experienced in the cocoa industry, a several years back, however, it took very controlled measures and cutting down and replanting of hybrid cocoa trees that had resulted in eradicating the cocoa pod borer disease. Initial, the impact it had on cocoa producers and exports took a tool on their income, however, the industry is slowing picking up to pre-crisis period. In fact, when i spoke to an industry insider, he said, the cocoa pod borer was a blessing in disguise, because, the aggressive effort to eradicate the disease resulted in farmer, taking care of their cocoa trees delicately. This resulted in high cocoa production. The coffee industry could face the similar fate, however, the onus is on the Coffee Industry Corporation to carry out aggressive campaigns to eradicate the disease.

Why am i sharing this? it is because, Research shows that PNG's kina exchange rate is a commodity currency, hence any negative developments affecting PNG's major export commodity, will surely affect the kina exchange rate. How does this work? the Banking system needs foreign exchange inflows so that importers can use that foreign exchange to purchase imported items. Low inflows of foreign exchange due to coffee pod borer, while import demand remained high, would result in either depreciation of the kina or, depletion of foreign reserves.
Give this as an election year, and the cash flow problems of the Government, such supply shocks can cause a financial crisis. The Government of the agencies involved with export commodities in PNG should be proactive and eradicate supply shocks that are manageable if done properly.

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Life is fragile, take each turn with caution, and live it to the full...

Over the years, the coffee industry via, the Coffee Industry Corporation has tried its best to mitigate or prevent the entry of infectious disease spread by insects that affect the fruition of coffee beans. The latest news we hear is of the presence of coffee pod borer disease in the Eastern Highlands province. This is sad news for the country, where finest natural coffee is produced without use of fertilizers.